Cotton bulls made it 9 in a row for their weekly win streak, with the Mar contract gaining 195 points (around 1100 for the current streak). The Mar – May spread finished strengthen over the course of the week, finishing at (17) points. Our models again turned out to be correct for the fourth consecutive week, which is why we use them.
Demand for US bales for export has been relentless over recent weeks. Total net sales for the week ending Dec 14 were significantly higher Vs the previous sales period at around 337K RBs while shipments were off (and remain very disappointing) at around 163K RBs. Export sales figures were more than three-fold the weekly pace required in order to match the USDA’s upwardly revised export target (14.8M 480lb bales) while shipments were again less than 50% of the requirement. The US is 75% committed and only 20% shipped Vs the USDA’s export target.
Shipment figures are beginning to be a bit concerning, although one could not judge so simply by recent market action. Backlogs at country warehouses are reported to be quite burdensome.
We discussed in this space last week that the reasons behind our belief that mill on-call commitments would continue to increase over the near-term. And they have done just that. For the week ending Dec 15 mill commitments increased to approximately 15M bales against all active contract months – they are nearly 12M bales against remaining months within the current marketing year. This remains a bullish scenario for our market, especially considering that less than 50K bales are currently certificated for delivery, although we expect this to change (potentially rapidly) if futures prices remain elevated.
Producers who ignored all wise counsel and didn’t price any portion of their crop ahead of harvest have been rewarded with a combination of basis and market rallies. Combined with near record yields and quality in many areas, it should be a merry Christmas, indeed. But we’d caution against drawing too much from this year’s market. No amount of planning could have predicted the combination of weather, quality issues, and shifting mill demand that brought this fall’s strong spot prices and it will be risky to assume the cycle will repeat in 2018.
But farmers are natural gamblers, and we expect many producers may be reluctant to forward contract the 2018 crop with prices in the mid-70s. For the short- to medium-term, we understand that reluctance, and see no problem with waiting until January to become more aggressive about marketing a crop not yet in the ground. With that said, however, it’s hard to find a downside to setting a price floor under a portion of your crop with a few out of the money Dec 18 puts. A one to two cent investment in options could buy you the flexibility to take advantage of much greater swings in both the futures market and the basis later in the year.
For next week, the standard weekly technical analysis for and money flow into the Mar contract remain bullish; the market is now in a technically much overbought condition on a both a daily and weekly basis. Next week will be an abbreviated trading week sandwiched between major holidays – a period that has, on more than a few occasions, proffered surprising market action.
Have a very Merry Christmas!